Mexico's Big Bet on the Future of Fossil Fuels Will Get Help from a Canadian Pipeline Company
09.26.2022 By - NEWS

September 26, 2022 [Financial Post] – Deal with TC Energy called ‘crucial’ for North America


Mexico is making a big bet on the future of fossil fuels with some help from a Canadian pipeline giant.

Bucking broad global sentiment urging a shift away from fossil fuels, Mexico is building a large oil refinery on its Gulf Coast, in the southeastern state of Tabasco. Once operational, the new refinery is expected to expand Mexico’s oil-processing capacity by 20 per cent, while reducing its dependence on imported gasoline, diesel and jet fuel.

Assisting Mexico with its energy ambitions is the $4.5-billion Southeast Gateway Pipeline project, announced last month by Calgary-based TC Energy Corp.

The pipeline will carry up to 1.3 billion cubic feet per day of natural gas to the southeast region of Mexico, and, crucially, offers up an additional power source for the new state-owned Olmeca Dos Bocas refinery.

Tabasco Governor Carlos Manuel Merino Campos, who is visiting Canada this week, said the pipeline will deliver gas that could be used to power the refinery as well as other industrial firms in the growing region. Merino Campos also said the deal with TC Energy shows the country’s openness to foreign investment — a remark that appeared to rebut recent trade complaints from the United States suggesting that Mexico’s energy strategy discriminates against foreign companies.

“This agreement with (TC Energy) is something necessary for Mexico and it shows that Mexico wants to have private investors in our country,” said Merino Campos.

TC Energy will partner with Mexico’s state-owned electric utility, Comisión Federal de Electricidad (CFE), the utility’s first public-private partnership, to build the 715-kilometre offshore pipeline.

The project is anticipated to be in-service by 2025, just three years after the joint final investment decision was announced — a pace that appears blistering compared with the hurdles and delays connected with another high-profile TC Energy project, the controversial Coastal GasLink pipeline.

The Canadian pipeline company may find Mexico to be a particularly hospitable jurisdiction at the moment thanks to Mexican President Andrés Manuel López Obrador’s desire to build out infrastructure to end the country’s reliance on imported fuels and become energy self-sufficient.

Tabasco’s secretary for economic development and competitiveness called the deal with TC Energy “crucial” for North America, particularly in light of Russia’s invasion of Ukraine and the disruption to global energy supplies.

“We must work together to have this energy sovereignty, to help our countries face all the financial threats or the energy threats that we may have,” said Jose Friedrich Garcia Mallitz. “This project is showing this bond because the gas is going to come from the United States, the pipeline is going to come from Canada and Mexico is going to benefit from all of this work together as a team.”

TC Energy is also poised to benefit significantly from its latest venture in Mexico.

Mexican assets currently contribute roughly seven per cent of TC Energy’s earnings before interest, taxes, depreciation and amortization, and are projected to grow to roughly 12 to 14 per cent of EBITDA in 2026, according to an analysis by RBC Capital Markets.

The deal has also resolved a protracted dispute between CFE and TC Energy over fees the Canadian company was to earn from two other pipeline projects.

The two companies have agreed to terminate arbitration proceedings, with TC Energy earning a return on previous capital invested, the company said in August.

TC Energy isn’t entering uncharted waters, having previously completed an offshore natural gas pipeline, Sur de Texas, in Mexico in 2019.

CEO François Poirier previously said the public-private partnership will develop critical energy infrastructure serving the growing central and southeast regions of Mexico.

“The Southeast Gateway Pipeline will be TC Energy’s second marine natural gas pipeline in Mexico, connecting to the coastal regions of Veracruz and Tabasco, and is another prime example of our ability to originate world-class projects that offer incremental growth to our long-term outlook,” Poirier said in an Aug. 4 statement.

The trade delegation from Tabasco met with executives at TC Energy in Calgary this week before making stops in Toronto, Ottawa and Montreal.

The visit comes as a quiet battle may be brewing between Mexico and its allies over Mexico’s direction on energy which its northern neighbours argue could violate the Canada-United States-Mexico Agreement (CUSMA).

U.S. trade representatives have warned that Lopez Obrador’s policies privilege state-owned oil producer Pemex and electricity provider CFE. Some private foreign firms have also complained about delays or revocations of permits.

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